The Situation:
Twice widowed, Rita, 66, wants to spend her retirement in New Jersey, but she also wants to be sure that her assets and income can support her cost of living. She knows her investments are on the conservative side, but she wants to make sure her money is there when she needs it. Rita also wants to delay taking her own Social Security benefits as she already receives a reduced benefit from her deceased husband.

The Way Out:
The Middlesex County woman is on the right track, and her lack of debt and spending discipline are a great asset. She needs to consider investing with about 50 percent in equities, and to pare down the 30 percent of her portfolio that’s in bonds and certificates of deposit. She could also sell her stocks and use the proceeds to further diversify her portfolio.

Rita, 66, has been widowed twice, and she says she’s disciplined herself to “save, save, save” all her life. She wants to convert those savings into an income stream that will support her in retirement, which she says she wants to start as soon as possible.

“Some of my portfolio is more risky than what I would be comfortable with in retirement since it has to last,” Rita says. “I need help figuring out how to know what to do with my diverse accounts and getting that necessary income.”

Rita also has concerns for her son, who has been unemployed for almost a year while his significant other works three part-time jobs to make ends meet. Rita thinks she may help out financially, and soon — if she can afford it.

Rita, whose name has been changed, has saved $113,700 in 401(k) plans, $67,200 in IRAs, $22,500 in a brokerage account, $337,000 in mutual funds, $288,000 in certificates of deposit and $114,000 in checking.

She also has a cash balance pension worth $197,000, but if she takes a lump sum, she’d only get about $98,000. Or she can take an annuity of $688 a month when she retires.

“She admits to becoming more income-focused opposed to growth-focused as she has moved closer to retirement, but wants to retain some risk to protect her assets from inflation,” Viscuso says.

Rita also wants to delay collecting her own Social Security until age 70. Her current benefits come from her late husband, a decision that Viscuso calls sensible.

“Women tend to live longer than men. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95,” she says.

Viscuso says Social Security benefits can be a source of protection against outliving savings, and delaying will increase benefits.

Rita’s other guaranteed retirement income source is her pension, which is insured by the Pension Benefit Guaranty Corporation, an independent government agency that was created by the Employee Retirement Income Security Act of 1974 (ERISA).

Viscuso said PBGC will pay all pension benefits earned by an organization’s retirees up to the legal limit of $54,000 a year for a 65-year-old. Because Rita’s pension is within the $54,000 limit, even if her pension plan runs into financial difficulty during her lifetime, her monthly annuity income should be protected by the PBGC.

The rest of Rita’s portfolio, though, should be more diversified, Viscuso says.
“The best case for her would be to invest in 50 percent in bonds and 50 percent in growth assets,” she says.

Rita’s is heavily weighted in certificates of deposit (CDs) and bonds, which make up more than 30 percent of her total portfolio.

“CDs are a satisfactory investment for now, but as interest rates start to rise, government agencies will provide a higher return,” Viscuso says, noting that interest rates are at or near all-time lows. “When interest rates begin to rise investors will lose value in bond funds.”

She says if an investor purchases laddered individual bonds — those that reach maturity at different times — held to maturity versus bond funds, capital will not be lost when rates rise.

Viscuso recommends Rita sell her individual stock positions because even though they only make up a small percentage of her total portfolio, they are still too risky. She says investors trying to be safe may avoid investing in a highly volatile stock market.
Rita is also missing a few asset classes altogether.

Viscuso says she doesn’t have a broad-based commodity fund, rather than one that only invests in gold, and Rita is also missing real estate investment trusts.

“REITs are securities that sell like a stock on the major exchanges and invest in real estate directly, either through properties or mortgages,” she says. “REITS are a huge asset class that have performed well, providing investors with high yields over the last ten years.”

Rita is also missing international bond funds, which can provide investors with global diversification in a low risk asset, she says.

Retirees need to be certain that the value of their savings keeps up with inflation. If this fails, inflation will eat away at the value of their savings, she says.

For this reason, Viscuso recommends Rita move the money from her CDs and bank accounts into a brokerage account that invests in a conservative yet diversified portfolio.

“Keeping too large amount of savings in CDs and checking accounts — in her case more than $200,000 — is safe, but it earns less than the inflation, thus reducing the buying power over the time,” Viscuso says. “The average long-term inflation rate has been around 3.1 percent. One- to five-year CDs are yielding approximately .15 percent to less than 2 percent today.”

Taking all this — and the fact that Rita has no debt, and that she may financially help her son — into account, Viscuso ran a Monte Carlo simulation, which simulates all kinds of variables for an investor’s plan.

Viscuso says the simulations clearly demonstrate success for Rita.

“Even with the use of conservative assumptions, Rita is in great shape with a Monte Carlo score of 100 percent,” Viscuso says. “Rita has a zero percent chance of outliving her savings with the proper diversification and professional portfolio management.”

Get With the Plan is designed to illuminate personal finance concepts and isn’t a substitute for actual financial planning or dedicated professional advice. To participate, contact Karin Price Mueller at kmueller@starledger.com.